A Complete Guide to Short-term Loans

We may not always require a huge amount of money to deal with our necessities. Sometimes, all we need is a small amount of cash that may help us bridge the gap between our paychecks and our needs. It can be used for pretty much everything such as healthcare, debt consolidation, or any other emergencies. Unexpected bills often catch us off guard if we do not have a safety net. A Short-term Loan can help you cope up with the sudden expenses with ease and convenience. However, it is equally important to know everything about this financial product before you apply for it. These loans have comparatively high rates of interest because the repayment period is short. Lenders offer a wide range of short-term loans in the United Kingdom to help you facilitate your necessities.

What is a Short-term Loan?

It is a small loan that you can borrow for a brief period that generally lasts up to 12 months. These are unsecured and hence, do not require any collateral as security. In addition to that, some lenders do not even require you to arrange a co-signor for your loan application. They are the advanced version of payday loans. A payday loan allows a borrower to repay it within a month or when their paycheck arrives. However, a short-term loan provides flexibility in terms of the repayment period. That means you have a little longer to pay your debt off, and you may also make the repayments in fixed monthly instalments. For this reason, they are also known as Instalment Loans. Individuals who do not have a perfect credit history may also apply for this loan.

How Do They Work?

You have to apply for the loan online by visiting the website of the lender or the credit broker. Fill the application form and provide all the details that are asked in it so that the lenders can make their decision. The lenders will assess your affordability before giving their final nod to your application. If the lender approves it, they may transfer the funds to your bank account within a few hours. A few lenders also disburse the funds on the very same day. However, the actual time it may take for the disbursal also depends on your bank. You may use the money for anything except for illegal purposes, gambling, investing in the stock market, and so on. As a borrower, you have to decide the repayment period. You have to make timely payments to avoid any damage to your credit score.

Different Types of Short-term Loans

These loans often help us to bridge the gap in our finances when we find ourselves stuck with any unexpected bills. Lenders usually advertise those using different labels as it makes easier for a borrower to choose the right product according to their needs. Before you rush out to make your decision of borrowing a loan, you must know the various types of short-term loans that are generally offered by the lenders.

Payday Loans: These are the most controversial form of borrowing. However, the Financial Conduct Authority has regulated the payday lending market in 2015. You may borrow this for 1 month or until your next paycheck arrives without providing any collateral. They are also known by the names of a payday advance, salary loan, and cash advance loan.

Quick Loans: These are called quick loans because some lenders disburse the loan on the same day. It may be a 3 Month Loan or a 12-month loan. As it is available to a borrower in less time, lenders advertise this as quick loans.

Instalment Loans: Short-term instalment loans allow a borrower to repay it in monthly instalments. The repayment amount may be fixed or variable as there are two types of loans – fixed interest rate loan, and variable interest rate loan. If you choose a fixed interest rate loan, then you have to pay a fixed amount of money every month until your balance is cleared. However, with a variable interest rate loan, the monthly payment amount may fluctuate depending upon several factors.

Debt Consolidation Loans: These loans can be taken out to repay your existing debts. If you have multiple debts and you are struggling to repay them, then this loan can prove to be beneficial for you. You have to pay only one repayment every month against all your outstanding debts. It may also help you save some amount of money as you will be charged only a single interest rate.

Cash Loans: All the short-term loans are Cash Loans as the lender transfers the funds to your bank account if your application is approved. You may withdraw the amount and use it in cash. That is the reason they are known as cash loans. They are no different from a short-term loan.

Sources of Getting a Loan

Gone are those days when the only source of getting a loan was a bank. Traditional banks have stringent criteria governing lending policies. Generally, these banks do not provide short-term loans as they focus more on long-term loans. A long-term loan allows a borrower to take out more money as compared to a short-term loan and also is secured by collateral. This led to a gap as individuals who needed a small amount of funds for keeping up with their day-to-day expenses couldn’t get a loan from these banks. We’ve listed a few sources from where you can get a short-term loan:

• Credit Cards: This is an ultimate source of borrowing and proves to be helpful during emergencies. Apart from that, it is also used for regular expenses. An amount is set on the card and it allows you to spend it. The limit is pre-set by the bank or the credit card company. Once you exhaust the limit – you have to make the repayments to use the card again.

• Overdrafts: It allows you to take a loan through your current account with the bank. Authorised overdrafts mean you will agree to a borrowing limit proposed by your bank. An unauthorised overdraft is when you spend more than what you have in your bank account in an unplanned way. Both of these have some charges that you have to pay.

• Credit Unions: These are cooperatives run by and for the profit of the members of the union. They are regulated by the Financial Conduct Authority and the Prudential Regulatory Authority. The interest rates are comparatively lower.

• Personal Loan: It allows you to borrow money for large purchases. You can get it from private lenders who are available online or from banks. These are unsecured and doesn’t even need you to find a guarantor for your loan application.

Eligibility Criteria for Applying for a Short-term Loan

You should always review the criteria of the lenders before applying for a loan. It will help you in knowing whether you fit in or not. Different lenders may have different criteria for lending, however, there are a few common and general criteria that we have listed below:
• You must be a legal citizen of the United Kingdom.
• You must be 18 years or above when applying for a short-term loan.
• You must have a valid and functional bank account as most of the lenders transfer the funds (if the loan application is approved) to the bank account.
• You must be in employment as that will indicate that you have a source of income to repay the loan that you’re applying for.

How Much Can You Borrow?

The lenders we are associated with allow an individual to borrow an amount ranging from £100 to £1,000. You can choose an amount depending on your affordability and financial requirement. But the amount that a lender will approve for you, depends on several factors, such as:

• Income: The amount of money that you earn every month influence the amount that you will be approved for.

• Expenses: The lenders may also take into consideration how much money you spend every month towards your debts, and other regular expenses so that they can know whether you will be able to afford the repayments of the loan that you have borrowed from them.

• Credit Score: Your credit score also plays a major role for the lenders to decide on the loan amount. If you have a perfect credit record, the lender may allow you to borrow £1,000. However, with a not so perfect credit score, the chances of borrowing £1,000are less likely to happen.

Impact on Your Credit Score

A short-term loan definitely impacts your credit score. Whenever you borrow a loan, a credit check is conducted on your profile to review your past relationship with credit. That leaves a footprint on your report and also knocks off a few points from your report. But the best thing is – whenever you make the repayments on time and in full – it improves your credit score. It cannot be observed overnight, as it is a gradual process and hence, it will take time, patience, and your efforts. Similarly, if you miss a repayment or fail to meet any of your repayments – your credit score will be harmed.

To help you protect your credit scores from being damaged, many lenders are now offering Soft Credit Check Loans. These are not any special type of loans – they can be long-term or short-term. Lenders carry out a soft credit check to provide the borrowers with their initial quotes. Soft credit check (also known as soft pull) doesn’t impact your credit score. This way, the borrower gets to know what rates are available to him and the lender gets to know whether the applicant is eligible for a loan or not. However, a hard credit check is carried out by the lenders before giving their final nod of approval and this is mandatory by law.

You may check your credit report from one of three major Credit Reference Agencies (CRA) of the United Kingdom, namely, Equifax, Experian, or CallCredit (now known as TransUnion).

How to Choose the Right Short-term Loan?

To choose the right short-term loan you must know the key things that you should consider are. You should always compare loan offers from multiple lenders to know the different rates that are available are and hence, it will make it easier for you to choose the right financial product according to your needs and requirements.

• Annual Percentage Rate (APR): This indicates the overall cost of borrowing money. Hence, you must always take into consideration the APR while comparing loans. It is the annual interest rate and not the monthly interest rate. It also includes any fees and charges that must be payable to the lender for borrowing money.

• Monthly Repayments: Determine the monthly repayments that you will be making each month towards your loan. The amount must be affordable by you after your regular expenses.

• Reliability: You must always deal with credit providers and brokers who are registered by the Financial Conduct Authority. Check them up on the Financial Services Register. You will find all the details of them if they are authorised.

• Reviews: Research online and find out the reviews given by any customers for the lender or credit broker that you are considering to deal with. You will get to know an overall borrowing experience of the previous borrowers and make your decision accordingly.

• Terms & Conditions: Read the Terms & Conditions offered by the lender before signing on the dotted line. If you do not understand something, raise a flag and discuss that with your lender so that both of you can form an amicable resolution to your problem.

• Upfront Fees: Check with the lender or credit introducer if they charge their borrowers with an upfront fee.

What to Consider Before Applying?

Sometimes, lenders reject some of the loan applications. You should be in-line with the requirements of the lender so that the chances of approval of your loan application is higher. Check out the following things before applying for a loan:

• Credit Report: Check your credit report before applying and scan for errors. If you spot any errors, report it to the agency and get the report updated.

• Eligibility Checker: You will find a lot of lenders offer a free eligibility checker. It’s a tool that helps you determine whether your profile stands any chances of approval.

• Review your Information: When you are filling up the application form, ensure there are no errors. Provide accurate information that will help the lenders to form their decision.

Pros and Cons of a Short-term Loan

Pros

You do not have to provide any collateral for borrowing a short-term loan.

It allows you to borrow a small amount of money for a brief period.

Timely repayments will help you in improving and maintaining your credit score.

Flexible mode of borrowing as you can spread the cost of repayments over 12 months.

One of the best options for emergencies because if your loan application is approved, the lender may disburse the funds on the same day.

Cons

The rate of interest for these loans are high because the lender is taking the risk by not asking for any collateral or guarantor.

You may fall into a debt cycle if you keep on borrowing new loans to pay off the existing ones.

These loans cannot be of much help if you need to make a large purchase or if you need money for more than a period of 12 months.

Some lenders may charge you an additional fee if you repay the loan before the agreed end date, which is known as – early repayment penalty.

Alternatives to Short-term Loans

If you think that a short-term loan is not the borrowing option that you may consider keeping in mind your current financial circumstances and need, then a variety of other options are also available. Listed below are some of the alternatives that you may find apt for your needs:

• Community Development Financial Institutions (CDFIs): You can borrow loans from these small and independent organisations as well. They focus on lending to people who have been denied for a loan from banks or other financial institutions.

• Advance Payment: You may try asking your employer to pay your wages in advance. Discuss with them the repayment strategy so that they will be assured that you will pay them back.

• Friends and Family: Who can understand it better than your closed ones during rainy days? Ask your friends and family for helping you out. Tell them how much you need and for how long. They may come forward to help you.

• Credit Card: You can use your credit card to manage the sudden expenses for which you are looking to borrow some money. If you have maxed out on that too, contact your bank or credit card company to know what can be done.

Frequently Asked Questions

We have answered some of the questions in this section that you must be thinking about. Quick and short answers to 10+ questions that you might have about a short-term loan are listed here. This may help you in deciding and choosing the right financial product for your needs.

The Bottom Line

A short-term loan is a flexible mode of borrowing a small amount of money for a brief tenure. It allows you to have a quick fix when you face a financial crisis in the middle of the month. Mostly, people also use this loan for other purposes as well. It should be borrowed when you do not have any other option left for funding and you can easily afford the repayments. Failing or missing the repayments cause severe damage to your credit score. After a certain number of failures, the lender may report it and you may receive a County Court Judgement. A CCJ will impact your borrowing journey for the next 6 years as lenders will find you a potential risk to lend money to. Therefore, evaluate the exact amount that you need and map out a repayment strategy. Always ensure to compare the loan offers that you may receive as it will help you in choosing the best one available to you.

If you think that you can afford all the repayments of a short-term loan, it will only take a few minutes for you to Apply with us.